OptionFlow

As part of my toolbox, in order to make trade decisions, I have developed an application that scans in realtime for unusual optionflow.

Although a conventional Put/Call ratio shows the relation between ALL Put and Call volume at any given time, it does not necessarily indicate whether this is bullish or bearish activity.

Options can either be “bought” or “sold” in order to open a position.

Therefore we can assume that a “buy to open” of a Call contract is a bullish trade, where as a “sell to open” can be construed as a bearish trade. And vice-versa with Put contracts.

So if at any given time, we see an “unusual” large Put to Call ratio, we won’t be able to safely assume that this would be bearish activity; simply because we don’t know whether the Puts were bought or sold, and whether the Calls were bought or sold.

For this reason I opted to distinguish whether a trade entered the market “at”, or “above” the ask. Indicating that most likely it’s a buy of the contracts.

Furthermore, the application filters out the small trades, which in my opinion is just noise, and only alerts activity on “large” trades entering the market.

For example, the application filters out all trades on SPY options, that have a capital committed less than $100,000, and only alerts on trades that are larger.

Due to limited computing resources, and the fact that I’m using a free datafeed, the application is limited to only alert on a watchlist of about 30 tickers, and 2 weekly expiration dates. Which for me is sufficient since I daytrade weekly options on only a select few high beta stocks.

In the future I hope to increase its capabilities, as well as being able to tweet/post reports at regular intervals.

For now you can follow the application’s alerts on twitter at @gr8estbot

Comments

OptionFlow — 3 Comments

>>> For this reason I opted to distinguish whether a trade entered the market “at”, or “above” the ask. Indicating that most likely it’s a buy of the contracts.

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I’d like to add:

It’s a desperate buy to get into the action NOW, and not set a bid & wait for it to get hit. That is the greatest indication of a strong belief in the direction of the move, especially considering how much capital is put at risk on these trades. However, not all these bets pay off, so still use only as a guide, not a fail-safe trigger to follow

Absolutely. It’s a “tool”, and should never be followed blindly. Since the bid/ask spread on high beta’s are very thin; SPY and IWM, usually just 1 or 2 pennies, I don’t see a large trade at the “ask” as a desperate buy, but rather a “want to make sure” to get the trade.
thanks,
P.